As signalled a while back, in response to the ongoing global financial crisis the New Zealand Reserve Bank is joining other Central Banks in exposing taxpayers to billions in contingent liabilities, outside of normal Parliamentary budget processes. And those processes might have raised some interesting questions.
The New Zealand Herald this morning has reported that ANZ and Westpac are the first banks to gain approval to swap residential mortgage-backed securities for cash reserves from the Reserve Bank, should they need it.
From what I’ve read, New Zealand banks are in a far better position than their U.S. counterparts – their problem, at this stage at least, may be more one of accessing capital at reasonable cost from the far edges of the financial world – but it still troubles me that the best anyone seems to be able to say for this kind of action (and taxpayer risk absorption on behalf of banks) is that “doing nothing may be worse”.
Over at Econbrowser, Prof. James Hamilton is suggesting (if I read him right) that the Feds recent asset swap actions have exposed U.S. taxpayers to $1.8 trillion U.S. in potential losses (this is over and above the bailout measures approved through the Paulson rescue plan), and the action may not even work, if the real problem (as it increasingly seems to be) is not liquidity per se, but rather that there are still too many “toxic” assets out there yet to be written down to realistic values. He notes that the Fed has already written down $2.7 billion U.S. in losses on one such asset swap.
I would argue that if the New Zealand Government (via the Reserve Bank) is going into the business of accepting greater banking system risk on behalf of New Zealand citizens, then we need to asking serious questions about the nature and extent of that risk, the mechanisms through which it is being absorbed, and what the people are getting in return.
Certainly, if the risk is significant, I would expect the Government to get, on behalf of the people of New Zealand:
a) great confidence that the measures will actually help relieve the crisis, and/or
b) a higher rate of return reflecting the asset risk (unlikely because the increasing cost of capital is part of the problem for NZ banks) and/or
c) an appropriate equity stake, if no other adequate payment is possible.